Thoughts on technolgy-driven change in business, the economy and Mr. Market.

Monday, October 11, 2004

Intel earnings preview

With Deutche Bank downgrading Micron and Texas Instruments before the open, I threw together a semiconductor/Intel earnings preview for CNBC this morning.

It went something like this:

When you see semiconductor downgrades now, after so much pain in the sector. It makes you wonder if it's time to give up hope for the sector. Or, if everyone is against the sector, maybe it's time to buy.

One look at the one year chart of Intel tells you a lot. Shares of Intel are down 32.5 percent in the last year. Intel reports earnings tomorrow and will give further guidance to the Street. Some money mangers aren't waiting for the call, and see opportunity the charts.

"Many semiconductors today have a price to earnings ratio a valuation that is at or even in some cases below the overall market," says David Sourby of Loomis, Sayles. "As an investor, its rare I get the opportunities to buy the semiconductor stocks at this attractive level when the economy in earnings in my opinion is above average so names like Intel which is generating about 8 to 9 billion dollars in free cash flow on an annual basis trades at a p/e below 20 with a free cash flow yield of six and a half percent. Those are usually pretty good earnings"

The Semiconductor has been plagued with inventory problems across the board. And it's not just about PCs. Analog chips are stacking up on the shelves. And makers of cell phone chips like Texas Instruments have also struggled with inventories this year.

It's not just slow demand. Believe it or not, Intel is also feeling the heat from long-time wanna-be AMD. "You know, it's hard to believe, but low and behold, AMD has been executing quite well," says Gus Richard of First Albany. "Right now they've got a better high-end server, high-end desktop product and they're taking share"

With Intel in particular, the margins often tell the whole story Intel's margins peaked in last years fourth quarter. And as soon as margins began to fall, so did Intel's share price. The only way out of this situation is for demand to pick up. And the demand just might not be there.

"My worry is that we don't have the end market demand to pull us out of that," says Eric Ross, semiconductor analyst with Think Equity. "And so we're going into seasonally worse first half of next year and it's unclear what the demand is in second half. So I would probably say we're going to see flat-ish growth next year and I wouldn't necessarily want to be in the stocks in a big way."

Semiconductors are for gamblers. And with these stocks so beaten down-- notice I didn't say cheap -- they're bound to attract some bets.